T.C. Memo. 2002-247
UNITED STATES TAX COURT
ANTONIO ROSARIO AND JOYCE ROSARIO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1378-00. Filed September 26, 2002.
Robert J. Fedor, for petitioners.
Katherine Lee Kosar, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: This case is before the Court on
petitioners’ motion for award of administrative and litigation
costs pursuant to section 7430 and Rule 231.1 Neither party
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. All references to sec. 7430 are to that section as in
(continued...)
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requested a hearing, and we see no reason for a hearing on this
matter. Rule 232(a)(2). Accordingly, we rule on petitioners’
motion on the basis of the parties’ submissions and the existing
record. Rule 232(a)(1). We incorporate by reference portions of
Rosario v. Commissioner, T.C. Memo. 2002-70 (Rosario I), our
opinion on the merits in the instant case, that are relevant to
our disposition of this motion.
After concessions,2 the issue for decision is whether
petitioners are the “prevailing party” in the underlying tax
case.
Background
Antonio Rosario (petitioner), an orthopedic surgeon,
executed a Professional Practice Agreement (the practice
agreement) with the Jesse Holman Jones Hospital (the hospital)
which provided that petitioner would receive funds from the
hospital to ensure a monthly income of $33,334 (guarantee
payment). During 1993, pursuant to the practice agreement,
petitioner received $242,556 in guarantee payments from the
hospital. In Rosario I, the issue was whether the $242,556
1
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effect at the time the petition was filed.
2
In respondent’s response to petitioners’ motion for
administrative and litigation costs, respondent concedes that:
(1) Petitioners meet the net worth requirements as provided by
law; (2) petitioners have exhausted the administrative remedies
available within the Internal Revenue Service; and (3)
petitioners have not unreasonably protracted the litigation.
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petitioner received from the hospital in 1993 was taxable income
to him in 1993. We held that the guarantee payments petitioner
received were not includable in his income in 1993 because those
payments were a loan.
Discussion
Section 7430 provides for the award of administrative and
litigation costs to a taxpayer in an administrative or court
proceeding brought against the United States involving the
determination of any tax, interest, or penalty pursuant to the
Internal Revenue Code. An award of administrative or litigation
costs may be made where the taxpayer (1) is the “prevailing
party”, (2) exhausted available administrative remedies,3 (3) did
not unreasonably protract the administrative or judicial
proceeding, and (4) claimed reasonable administrative and
litigation costs. Sec. 7430(a), (b)(1), (3), and (c). These
requirements are conjunctive, and failure to satisfy any one will
preclude an award of costs to petitioners. Minahan v.
Commissioner, 88 T.C. 492, 497 (1987).
To be a “prevailing party” (1) the taxpayer must
substantially prevail with respect to either the amount in
controversy or the most significant issue or set of issues
presented, and (2) at the time the petition in the case is filed,
3
This requirement applies only to litigation costs. Sec.
7430(b)(1).
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the taxpayer must meet the net worth requirements of 28 U.S.C.
sec. 2412(d)(2)(B) (2000). Sec. 7430(c)(4)(A). A taxpayer,
however, will not be treated as the prevailing party if the
Commissioner establishes that the Commissioner’s position was
substantially justified. Sec. 7430(c)(4)(B). For purposes of
the administrative proceedings, respondent’s position is that
which was articulated in the notice of deficiency. Sec.
7430(c)(7)(B); Huffman v. Commissioner, 978 F.2d 1139, 1143-1147
(9th Cir. 1992), affg. in part and revg. in part T.C. Memo. 1991-
144; Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997).
For purposes of the court proceedings, respondent’s position is
that which was set forth in the answer. Sec. 7430(c)(7)(A);
Huffman v. Commissioner, supra at 1147-1148; Maggie Mgmt. Co. v.
Commissioner, supra at 442.
The substantially justified standard is “essentially a
continuation of the prior law’s reasonableness standard.”
Swanson v. Commissioner, 106 T.C. 76, 86 (1996). A position is
substantially justified if it is justified to a degree that could
satisfy a reasonable person and has a reasonable basis in both
fact and law. Pierce v. Underwood, 487 U.S. 552, 565 (1988);4
4
Although the dispute in Pierce v. Underwood, 487 U.S. 552
(1988), arose under the provisions of the Equal Access to Justice
Act (EAJA), 28 U.S.C. sec. 2412(d) (1994), the relevant
provisions of the EAJA are almost identical to the language of
sec. 7430. Cozean v. Commissioner, 109 T.C. 227, 232 n.9 (1997).
We, therefore, consider the holding in Pierce v. Underwood,
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Huffman v. Commissioner, supra at 1147; Swanson v. Commissioner,
supra at 86. A position that merely has enough merit to avoid
sanctions for frivolousness will not satisfy this standard.
Pierce v. Underwood, supra at 566.
The determination of reasonableness is based on all of the
facts and circumstances surrounding the proceeding and the legal
precedents relating to the case. Coastal Petroleum Refiners,
Inc. v. Commissioner, 94 T.C. 685, 694-695 (1990). A position
has a reasonable basis in fact if there is such relevant evidence
as a reasonable mind might accept as adequate to support a
conclusion. Pierce v. Underwood, supra at 565. A position is
substantially justified in law if legal precedent substantially
supports the Commissioner’s position given the facts available to
the Commissioner. Coastal Petroleum Refiners, Inc. v.
Commissioner, supra at 688. Determining the reasonableness of
the Commissioner’s position and conduct requires considering what
the Commissioner knew at the time. Rutana v. Commissioner, 88
T.C. 1329, 1334 (1987); DeVenney v. Commissioner, 85 T.C. 927,
930 (1985).
The fact that the Commissioner loses on the merits or
concedes the case does not establish that a position was not
substantially justified; however, it is a factor to be
4
(...continued)
supra, to be applicable to the case before us. Cozean v.
Commissioner, supra.
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considered. Powers v. Commissioner, 100 T.C. 457, 471 (1993),
affd. in part and revd. in part 43 F.3d 172 (5th Cir. 1995).
Respondent contends that petitioners are not the prevailing
party because his position is substantially justified in that he
had a reasonable basis in both fact and law.5 Petitioners argue
that they substantially prevailed with respect to the amount in
controversy, as well as with regard to the most significant
issue, whether moneys petitioners received constituted additional
income or qualified as loan proceeds.
In Rosario I, we were required to examine and interpret the
practice agreement in order to resolve the issue. We did not
have any testimonial evidence to aid in interpreting the practice
agreement because the parties submitted the case fully
stipulated. Although we ultimately held for petitioners, our
holding was not easily reached.
The relevant language in the practice agreement regarding
the guarantee payments was not clear. The agreement provided, in
part:
To the extent that Physician’s gross income in any
month during the term of this Agreement is less than
$33,334.00, the Hospital will pay Physician by the
tenth day of the closing of the Physician’s books for
that month any amount sufficient to raise Physician’s
income for that month to $33,334.00 (such payment by
5
Respondent alternatively argues that the amounts of costs
claimed by petitioners are unreasonable. Because we find that
respondent’s position was substantially justified, we need not
reach respondent’s alternative argument.
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Hospital, will be referred to as a “Gross Guarantee
Payment”). If, during any month of the term of this
Agreement, Physician’s income is greater than
$33,334.00, Physician will pay to Hospital by the tenth
day after the closing of Physician’s books for the
month, the excess over $33,334.00, to the extent
necessary to reimburse hospital for Gross Guarantee
Payments previously paid. Such payments by Physician
will be made to the Hospital during the term of this
Agreement until the total amount of Gross Guarantee
Payments made by Hospital have been repaid in full.
The main ambiguity in the practice agreement was that the above
language could have been construed to favor respondent’s view
that petitioner would have to repay the hospital only to the
extent his monthly income were over $33,334; therefore, the
guarantee payments would not be characterized as a loan because
there would not be an unconditional obligation for petitioner to
pay them back. United States v. Henderson, 375 F.2d 36, 39 (5th
Cir.1967); Bouchard v. Commissioner, 229 F.2d 703 (7th Cir.
1956), affg. T.C. Memo. 1954-243; Haag v. Commissioner, 88 T.C.
604, 615-616 (1987), affd. without published opinion 855 F.2d 855
(8th Cir. 1988). The above language also could have been
construed to favor petitioner’s view that it required petitioner
to pay back the guarantee payments in all events, which would
support characterizing the payments as a loan.
On January 1, 1994, petitioner and the hospital signed an
amended practice agreement that provided:
Hospital intended that Physician, upon expiration of
the Income Guarantee, be required to repay that portion
of the Income Guarantee not repaid pursuant to the
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Guarantee Payback, regardless of the level of
Physician’s gross income, * * * .
It was not clear whether the amended practice agreement, which
was not signed until after the year in issue, changed, or instead
merely clarified, the parties’ intentions in the practice
agreement. To resolve the ambiguity, we examined all stipulated
documents and concluded that the evidence weighed in favor of
treating the guarantee payments as a loan. Although we did not
agree with respondent’s interpretation in the final analysis, we
believe that respondent’s position had a reasonable basis in law
and in fact given the ambiguity of the language in the practice
agreement.
Accordingly, we hold that petitioners are not entitled to an
award of administrative or litigation costs.
To reflect the foregoing,
An appropriate order will
be issued and a decision will
be entered for petitioners.